ANKARA (Reuters) — Turkish Prime Minister
Tayyip Erdogan accused political rivals of shameless fabrication of a
telephone tap of him telling his son to dispose of large sums of money
on the day police raided houses in a graft inquiry into his government.

In a dramatic session of parliament after posting of the 11-minute
audio tape on YouTube, Erdogan said his political enemies had
penetrated encrypted state communications. He did not name the
opponents but made it clear he was talking of a network run by
former ally, Islamic cleric Fethullah Gulen.

Supporters of Erdogan, locked in a power struggle with Gulen whom he
accuses of contriving a graft scandal to topple him, shouted
"Tayyip, we came here to die with you", "stand tall, don't bow" and
"time is on our side".

"The people don't believe these lies," Erdogan called back to loud
cheers and applause from the public gallery.

Growing political uncertainty around the government and its reaction
to the tapes, which Reuters could not authenticate, hit Turkish
assets amid broader weakness in emerging markets.

Opinion polls taken before Monday's posting show Erdogan's
popularity little affected by the corruption scandal which broke on
December 17 with the detention of businessmen close to him and three
ministers' sons. Monday's tape will prove a further test of that
resilience ahead of March local elections.

Erdogan took over a country in 2002 riven by political factionalism
and mired in economic crisis. In 11 years, presenting the generally
welcome face of a strong leader, he united a large spectrum of
political forces, fired the economy, drove economic reforms and
tamed a military that had toppled four governments in the second
half of the 20th century.

"They went and made a shameless montage and released it," Erdogan
told parliament. "They are even listening to the state's encrypted
telephones. That's how low they are."

"There is no allegation that we cannot answer."

The "they" cited by Erdogan was a clear reference to those among the
followers of U.S.-based Islamic cleric Gulen he accuses of building
a "parallel state" in Turkey, using power in the judiciary and
police to undermine him.

"We will reveal one-by-one all the disgraces of the parallel
organization and we will make those who walk with them so
embarrassed they won't be able to go out into the street," Erdogan
said.

The recording is purportedly of Erdogan and his son Bilal discussing
how to reduce the funds to "zero" by distributing them among several
businessmen. At one point, the voice supposedly of Bilal says some
30 million euros ($40 million) remain to be disposed of.

Government officials said previous such recordings may have been of
ministers and businessmen's voices but that the conversations were
put together from comments taken out of context to give the
impression of impropriety.

"They have wiretapped the Prime Minister, they have wiretapped the
chief of intelligence, Ministers, many others. They wiretap the
phone for 18 months, they listen to you, and then out of the 18
months of wiretapping they take two or three sentences," said one
senior official.

"Can you imagine the stories you can write out of those two or three
sentences, with no context, no background?"

ECONOMIC IMPACT

Gulen's Hizmet (Service) organization, which runs a wide network of
schools, businesses and media groups, exercises strong influence in
the police and judiciary. The cleric denies government accusations
it drew on this network to undermine Erdogan after a political
falling out between the two men.

Erdogan remains far and away Turkey's most popular politician. But
the apparent power struggle with Gulen and his purges of the police
and judiciary have cast a shadow over what Western powers long
vaunted as a prime example of an effective Islamic democracy.

Faruk Logoglu, former ambassador to Washington and vice chairman of
the main opposition CHP, said he believed there was no question
about the authenticity of the recordings, which his party replayed
to its deputies at a parliamentary group meeting.

"Saying it is fake doesn't mean it didn't take place. What else can
he say?.. In a minimally functioning democracy the first thing the
prime minister has to do is resign.

"He is clinging on to power and that's the problem. This is probably
the tip of the iceberg."

The recordings appeared two days after Erdogan's AK Party officially
began campaigning for March local elections that will be followed
later in the year by presidential polls that could decide Erdogan's
political future after 11 years in power.

The government has responded to the graft inquiry by dismissing or
reassigning thousands of police officers, tightening its control
over the appointment of judges and prosecutors, and pushing through
a new law that allows the authorities to block access to websites
within hours without a prior court order.

Erdogan, as in the past, suggested a broader conspiracy against
Turkey including The "interest rate lobby" of financiers and "the
terror lobby".

"The lobby of those who couldn't win the people's support, the mob
of losers came together once more on December 17. Now they are
saying 'we are going to rule Turkey'."

The growing political uncertainty hit financial markets.

The lira hit two-week lows against the dollar while stocks fell
three percent.

Timothy Ash, head of emerging markets research at Standard Bank,
said Erdogan was likely to go further on the offensive against those
he deems responsible for producing and leaking these tapes.

"This seems to be a battle to the end/death. The Gulenists seem to
want to wound Erdogan below the waterline to undermine the AK
Party's poll performance in March," Ash wrote in a note.

Social media and video-sharing sites have been awash with leaked
recordings presented as evidence of wrongdoing. As with the latest
recordings, Reuters has been unable to verify their authenticity.